Rheinmetall’s €73 Billion Backlog and Auto Exit Can’t Escape Morgan Stanley’s Defense Downgrade

Morgan Stanley cuts European defense sector rating to Equal-weight, citing lack of catalysts. Rheinmetall drops 1.4% despite record backlog and strategic pivot to pure-play defense.

Morgan Stanley has poured cold water on the European defense sector, cutting its rating to “Equal-weight” just as Rheinmetall prepares to unveil its streamlined future at the ILA Berlin air show. The call from strategist Marina Zavolock, who cited a lack of near-term catalysts and muted earnings-momentum expectations, landed heavily on a stock already nursing heavy losses. Rheinmetall shares slid 1.4% on Monday to €1,187, leaving them roughly 26% below the level at which they started the year and about 11% under their 50-day moving average. The downgrade also weighed on peers Hensoldt and Renk.

The timing is awkward because Rheinmetall is in the midst of a radical strategic overhaul. The company has agreed to sell its civilian automotive business, Power Systems, to the investor AEQUITA, a transaction that will trigger a €200 million impairment charge this year but turn the group into a pure-play defense contractor. Management expects the deal to close in the fourth quarter of 2026. On the operating front, the story remains bright: first-quarter 2026 revenue and profitability improved, and the order backlog hit a record €73 billion as of March 31. The paradox of strong fundamentals and a weak share price has become the defining feature of the stock since it peaked near €2,000 last September.

Zavolock’s downgrade reflects a broader sector reassignment at Morgan Stanley. The bank is growing more cautious on medical technology and life sciences while keeping its top picks in semiconductors, commodities, and financials. Defense, once a favorite, has been dropped from that inner circle. The strategist acknowledged that the long-term outlook for the sector remains positive, but argued that fresh triggers may not emerge until later in the year.

Against this mixed backdrop, Rheinmetall is betting that this week’s ILA Berlin air show will provide the next set of concrete catalysts. The company is moving heavy armor off center stage and putting high-tech systems front and center. Its loitering-munition system, the FV-014, capable of circling a target area for up to 70 minutes, will be on display alongside radar satellites developed by subsidiary ICEYE that deliver real-time, all-weather battlefield intelligence. New orders for these systems, if announced during the event, could help steady the stock.

Technically, the shares are trying to stabilize. They have climbed about 10% from the May low, and the relative strength index, at 42, has moved away from oversold territory. Yet the downward trend remains intact, and the 50-day line still sits comfortably above the current price. A slide back below €1,200 could quickly lead to a retest of the year’s trough.

Investors are left weighing a simple trade-off: Rheinmetall’s operational momentum and the promise of a simpler, more focused business model versus the absence of the kind of short-term triggers that analysts like Zavolock say are needed to reignite the stock. The ILA trade fair, running from tomorrow in Berlin, could provide those triggers – or confirm that the market’s patience has not yet been earned.